Devil Take the Hindmost

Edward Chancellor · 1999

Thesis

Speculation is not an occasional madness that strikes otherwise rational markets but a permanent feature of capitalism, recurring in every era with new instruments and new justifications, and neither markets nor regulators have ever been able to tame it for long.

The main ideas

Speculation is as old as markets themselves, traced here from ancient Rome to the late twentieth century.
Each mania arrives with a story of a new era: new technology, new markets or new financial instruments that seem to make the old rules obsolete.
Speculators are a recurring human type, and their biographies repeat across centuries.
Markets are not reliably efficient. Prices can detach from value for years.
Speculation invites regulation after each crash, but eventually escapes its restraints.

Speculation is permanent

Edward Chancellor's history opens with the origins of financial speculation, tracing the speculative spirit back to ancient Rome and through the Dutch tulip mania of the 1630s. It then moves through the London stock-jobbers of the 1690s, the South Sea scheme of 1720, the emerging-market loans of the 1820s, the British railway mania of 1845, the American Gilded Age, the crash of 1929, the period from Bretton Woods to the junk-bond era and Michael Milken, and Japan's bubble economy of the 1980s.

His argument, in the description of Kirkus Reviews, is that speculation is common, human behavior, found across classes and centuries, from tulips to the crash of 1929 to the Internet boom. It is not a deviation from normal markets but one of their normal states.

The mechanism is that the desire to get rich quickly, and the fear of missing out as others do, are permanent features of human nature. Whenever markets offer the chance, some people take it, and their success draws in others.

Implication: assume that speculation will recur in any market where prices can rise quickly. The question is never whether a mania will come, but how to recognize one while it is happening.

New eras

Chancellor's chapter titles trace a pattern: each mania arrives with a story of a new era. The projectors of the 1690s promised fortunes from inventions and joint-stock companies. The investors of the 1820s poured money into the bonds and mines of newly independent Latin American states. The railway mania of 1845 was driven by a technology that genuinely transformed Britain, a "ready communication" between places, in the phrase of his chapter title. The chapter on 1929 is titled "The End of a New Era."

The pattern is that the new technology or market is often real, and the gains to society are real, but the prices paid for shares in it run far ahead of what any company could earn. Investors lose not because the railways or the new markets failed, but because they paid too much for them.

The mechanism is that genuine novelty makes valuation hard. When the old measures do not seem to apply, investors abandon them, and price is set by enthusiasm.

Implication: when you hear that a new technology or market has made old valuation rules obsolete, treat it as the most familiar signal in financial history.

The speculator as a type

Alongside the manias, Chancellor profiles the people who drove them, including the railroad operator Cornelius Vanderbilt and the stock manipulator Jim Fisk of the Gilded Age, and the savings-and-loan operator Charles Keating of the 1980s. His chapter on the Gilded Age describes the era's investors as befooled, bewitched and bedeviled, and his chapter on the postwar decades calls its subject cowboy capitalism.

The pattern across these figures is that the same personality, bold, persuasive and contemptuous of rules, appears in every era, and is celebrated during the boom and condemned after the bust.

The mechanism is that booms reward exactly the traits that later cause ruin: risk-taking, leverage and confidence in one's own exceptional judgment.

Implication: be wary of the figures a boom celebrates. The qualities that make them successful in a rising market are the ones that magnify losses when it turns.

Doubting efficient markets

Chancellor doubts that markets are inherently efficient. His chapter on Japan's bubble economy of the 1980s, titled "Kamikaze Capitalism," shows prices for shares and land detached from any reasonable estimate of value for years.

His epilogue, "The Case of the Rogue Economists," turns to Long-Term Capital Management, the hedge fund run with Nobel-prize-winning economists that collapsed in 1998. Its models assumed markets behave according to stable statistical patterns; a single crisis broke those assumptions.

The mechanism is that markets are made of people, whose collective behavior can push prices far from value and keep them there longer than models or rational traders expect.

Implication: do not assume that a price is right because a market set it, and do not trust a model that assumes markets behave the way they have recently behaved.

Regulation and its limits

Chancellor closes by describing speculation as an anarchic force. After each crash, it provokes government restriction: new laws, new regulators, new rules on trading and credit. But in time, he argues, it slips its chains and runs amok again, as memories fade and new instruments escape the old rules. Each generation of investors, having missed the last crash, comes to believe the old lessons do not apply to it.

The mechanism is that regulation is written for the last crisis, while speculation moves to whatever is new and unregulated.

Implication: do not rely on regulation to prevent the next mania. The protection that lasts is personal: recognizing the signs and refusing to join.

Limits

The book appeared in June 1999, at the height of the Internet boom it discusses, and before that boom's collapse and the crises of the 2000s, so its account ends before some of the largest speculative episodes.
Its scope is narrow. The reviewer Russ Allbery noted that it concentrates on private, mostly stock markets in Britain and the United States, with Japan as the main exception.
Later scholarship has questioned its starting point. The historian Anne Goldgar argued in 2007 that the Dutch tulip mania was far smaller and less damaging than the traditional account, which drew on moralizing pamphlets of the time.

Reminiscences of a Stock Operator — the speculator's own account of the markets Chancellor describes from outside.
The Black Swan + Antifragile + Skin in the Game + The Bed of Procrustes — why models built on recent history fail in the rare crises that end manias.
The Intelligent Investor — the investor's defense against manias: insisting on a margin of safety.